OREANDA-NEWS. The success of the proposed tax increases that the president of Guatemala introduced to Congress hinges on overcoming likely court challenges, as well as the success of the ongoing reform to the country's tax authority, Superintendenca de Administracion Tributaria (SAT), Fitch Ratings says.

The government expects the tax proposals to raise GTQ5.8 billion (USD770 million or 1.1% of GDP) by increasing the corporate tax rate to 29% from 25%, raising some mining royalties to 10% from 1% and hiking cement and fuel distribution taxes. It would also raise personal income taxes, which will be partially offset by allowing tax payers to submit VAT receipts for income tax deductions.

We believe these tax increases would help address the sovereign's persistently low government-revenue base and increase resources to meet the country's social and infrastructure demands. Guatemala's ratio of general government revenues to GDP is below 11%, among the lowest of all rated sovereigns.

The government has failed to meet its tax targets for each of the last four years. Tax revenues were almost 1% of GDP, below target in 2015 due to problems at the SAT, as well as lower revenues from the oil and mining sectors and a court decision that struck down a telecom tax.

However, even if the tax increase proposal is approved by Congress, it could be challenged in the court system by the country's corporations, as the tax burden would mainly fall on them. Prior tax reform efforts have failed due to similar court challenges.

Even if the tax increases pass the legislature and prevail against forthcoming legal challenges, we believe the resulting revenue increases will be highly dependent on the ongoing restructuring and strengthening of the SAT. The president named a new superintendent and board of directors to SAT at the beginning of 2016 and they have begun to improve human capital and IT systems to reduce tax evasion. Additionally, the Congress approved a reform of the SAT in July that would strengthen the institution, including a change to the banking secrecy law that would allow the SAT to access financial information of contributors, with a judge's permission.

A reduction in corruption could also help reduce tax fraud and evasion in Guatemala. The former president and vice president, along with numerous other officials in the Perez Molina administration, were accused of fraud, leading to their resignation and arrest in 2015. Their trials are ongoing.

While Guatemala's fiscal deficits and debt levels remain low relative to peers, they compare unfavorably in terms of political stability, government effectiveness, rule of law, control of corruption, and government accountability. The strengthening of government institutions that contributes to an improvement in governance could lead to improvements in Guatemala's creditworthiness over time.